MEDICARE

Contractors and Private 

Plans Play a Major Role in 

Administering Benefits

Statement of Kathleen M. King

Director, Health Care

James Cosgrove

Director, Health Care

Testimony

Before the Subcommittee on Health, 

Committee on Energy and Commerce, 

House of Representatives

For Release on Delivery 

Expected at 10:00 a.m. EST

Tuesday, March 4, 2014

GAO-14-417T

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-14- , a testimony 

before the Subcommittee on Health, 

Committee on Energy and Commerce, House 

of Representatives

417T

March 4, 2014

MEDICARE

Contractors and Private Plans Play a Major Role in 

Administering Benefits

Why GAO Did This Study

Since the enactment of Medicare in 

1965, contractors have played a vital 

role in the administration of the 

program. The original FFS program 

was designed so that the federal 

government contracted with health 

insurers or similar private organizations

experienced in handling physician and 

hospital claims to process and pay 

Medicare claims rather than having the 

federal government do so. CMS now 

also contracts with private 

organizations that provide covered 

services under the MA program and 

the Part D prescription drug program.

This statement provides an overview of 

the manner in which CMS has 

contracted with private organizations to 

administer benefits in (1) original FFS 

Medicare, (2) MA, and (3) the Part D 

prescription drug program. It is based 

primarily on products that GAO has 

issued regarding CMS contracting with 

claims administration contractors to 

administer the FFS program, and with 

other private organizations as part of 

MA and the Part D prescription drug 

benefit programs. These products were 

issued from November 1989 through 

January 2014 using a variety of 

methodologies, including reviews of 

relevant laws, policies, and 

procedures; data analysis; and

interviews with contractors,

stakeholders, and CMS officials. We 

have supplemented information from 

our prior products with publiclyavailable data on Medicare private plan 

contracts and enrollment, CMS-issued 

guidance for Medicare private plans, 

and a review of relevant literature.

GAO has made numerous 

recommendations to CMS in these 

previous products and is not making 

any new recommendations at this time.

What GAO Found

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 

(MMA) reformed the way the Centers for Medicare & Medicaid Services (CMS), 

the agency that administers Medicare, contracts with claims administration 

contractors. From its inception, the process for selecting Medicare fee-for-service 

(FFS) claims administration contractors was stipulated by Congress and differed 

from most other federal contracts in that, among other things, the Medicare 

contracts were not awarded through a competitive process. The MMA repealed 

limitations on the types of contractors CMS could use and required that CMS use 

competitive procedures to select new contracting entities to process medical 

claims and provide incentives for contractors to provide quality services. CMS 

has implemented the MMA contracting reform requirements by shifting and 

consolidating all claims administration tasks to new entities called Medicare 

Administrative Contractors. CMS is currently in the process of further 

consolidating these contracts. The agency also uses other contractors to review 

claims to ensure payments are proper and investigate potential fraud.

CMS contracts with private organizations to administer benefits under Medicare 

Advantage (MA), but has an important administrative and oversight role. MA is 

the private plan alternative to FFS and differs from FFS in that CMS contracts 

with private entities, known as Medicare Advantage organizations (MAOs), to 

provide covered health care services to beneficiaries who enroll. MAOs are paid 

a predetermined monthly amount for each beneficiary enrolled in one of their 

health plans and must provide coverage for all FFS services (except hospice 

care), but may also provide additional coverage. The government first began 

contracting with private plans in 1973. Several laws since then have changed 

how the MAOs are paid and the types of plans that can participate. While 

contract requirements for MAOs and parameters of the program are largely 

derived from statute, CMS has responsibility to implement the program and 

ensure compliance with these requirements. 

CMS also contracts with private organizations, called plan sponsors, to provide 

the outpatient prescription drug benefit under Part D. Through the Part D 

contracts, plan sponsors offer prescription drug plans which may have different 

beneficiary cost-sharing arrangements (such as copayments and deductibles) 

and charge different monthly premiums. The Part D program relies on sponsors 

to generate prescription drug savings through negotiating price concessions with 

entities such as drug manufacturers, pharmacy benefit managers, and 

pharmacies, and managing beneficiary use. While CMS contracts with plan 

sponsors to provide the Part D benefit, the agency has oversight responsibilities. 

For instance, CMS is responsible for making accurate payments to plan sponsors

and ensuring the accuracy of information submitted by plan sponsors to the 

beneficiary-focused Medicare Plan Finder website. Medicare actuaries have 

attributed lower-than-projected expenditures in Part D to a combination of 

factors, including lower-than-projected Part D enrollment, slower growth of drug 

prices in recent years, greater use of generic drugs, and higher-than-expected 

View GAO rebates from pharmaceutical manufacturers to the prescription drug plans. -14- . For more information, 

contact Kathleen M. King at (202) 512-7114 or 

kingk@gao.gov or James Cosgrove at (202) 

512-7114 or cosgrovej@gao.gov.

417T
 

Page 1 GAO-14-417T

Chairman Pitts, Ranking Member Pallone, and Members of the 

Subcommittee:

We are pleased to be here today to discuss the Centers for Medicare & 

Medicaid Services’ (CMS) contracting in the agency’s administration of 

the Medicare program. Since the enactment of Medicare in 1965, 

contractors have played a vital role in the administration of the program. 

In fact, the original Medicare program was designed so that the federal 

government contracted with health insurers or similar organizations

experienced in handling physician and hospital claims to pay Medicare 

claims. In addition to contracting with organizations to process and pay 

claims in the original Medicare fee-for-service (FFS) system, CMS also 

contracts with private organizations to provide covered health services 

under the Medicare Advantage (MA) program, and outpatient prescription 

drug coverage under Medicare Part D.1

In fiscal year 2014 the Medicare program will cover more than 50 million 

elderly and disabled beneficiaries at an estimated cost of $595 billion.

With MA and the prescription 

drug program, private organizations that sponsor health plans are 

responsible not only for paying claims, but also for ensuring beneficiaries 

can access their benefits. 

2

 

1

Medicare consists of four parts. Parts A and B are known as original Medicare or 

Medicare FFS. Part A covers hospital and other inpatient stays. Medicare Part B covers 

hospital outpatient, physician, and other services. Part C is the private health plan 

alternative to Medicare FFS and primarily consists of plans that are offered under the MA 

program. Part D is the outpatient prescription drug benefit, which is provided through 

private plans.

In 

order to administer benefits to Medicare beneficiaries, CMS relies 

extensively on contractors to assist in carrying out its responsibilities, 

including program administration, management, oversight, and benefit 

delivery. In fiscal year 2014, approximately 38 million Medicare 

beneficiaries will be enrolled in original FFS Medicare and more than 

1.2 billion claims will be processed and paid for those beneficiaries by 

claims administration contractors. In February 2014, Medicare had 

571 contracts with MA organizations to provide medical benefits, and 

offer prescription drug benefits, to over 15.3 million beneficiaries, and an 

additional 85 contracts with organizations that provide prescription drug 

benefits outside of the MA program.

2

Congressional Budget Office, Medicare—May 2013 Baseline. (Washington, D.C.: 

May 14, 2013). This number only includes benefit payments.
 

Page 2 GAO-14-417T

This statement provides an overview of the manner in which CMS has 

contracted with private organizations to administer benefits under 

(1) original FFS Medicare, (2) Medicare Advantage, and (3) the Part D 

prescription drug program.3 It is based primarily on previous products that 

we have issued regarding CMS contracting with claims processors to 

administer the FFS program, and with other private organizations as part 

of the MA and Part D prescription drug programs. These products were 

issued from November 1989 through January 2014 using a variety of 

methodologies, including reviews of relevant laws, policies, and 

procedures; data analysis; and interviews with contractors, stakeholders, 

and CMS officials. We have made numerous recommendations to CMS in 

these previous products and are not making any new recommendations 

at this time. We have supplemented information from our prior products 

with publicly-available data on Medicare private plan contracts and 

enrollment, CMS-issued guidance for Medicare private plans, and a 

review of relevant literature. Our work was performed in accordance with 

generally accepted government auditing standards. Those standards 

require that we plan and perform the audit to obtain sufficient, appropriate 

evidence to provide a reasonable basis for our findings and conclusions 

based on our audit objectives. We believe that the evidence obtained 

provides a reasonable basis for our findings and conclusions based on 

our audit objectives.

From its inception, the process for selecting Medicare claims 

administration contractors was stipulated by Congress and differed from 

the process for awarding most other federal contracts in that, among 

other things, the Medicare contractors were not selected through a 

competitive process. Before Medicare was enacted in 1965, providers 

were concerned that the program would give the government too much 

control over health care. To increase providers’ acceptance of Medicare, 

Congress ensured that health insurers like Blue Cross and Blue Shield 

would play a key role in administering Medicare, as they already had 

experience as payers for health care services to physicians and hospitals. 

Medicare’s authorizing legislation required that the claims administration 

contracts be awarded to carriers and fiscal intermediaries—now referred 

 

3

Before July 1, 2001, CMS was known as the Health Care Financing Administration.

Medicare 

Modernization Act 

Reformed the Way 

CMS Contracts with 

Organizations to 

Process and Pay FFS 

Claims
 

Page 3 GAO-14-417T

to as legacy contractors.4

Beginning in the 1980s, the Department of Health and Human Services 

(HHS) asked Congress to amend its authority related to the selection of 

claims administration contractors, citing several reasons. HHS wanted 

greater flexibility to administer the program and improve services to 

beneficiaries and providers. In addition, HHS wanted to promote 

competition by opening up the contracting process to a broader set of 

contractors, achieve cost savings, and increase CMS’s ability to reward 

contractors that performed well. Congress included such reform in the 

Medicare Prescription Drug, Improvement, and Modernization Act of 2003 

(MMA).

By law, CMS was required to select carriers 

from among health insurers or similar companies and to choose fiscal 

intermediaries from organizations that were first nominated by 

associations representing providers, without the application of competitive 

procedures. In addition, CMS could not terminate these contracts unless 

the contractors were first provided with an opportunity for a public 

hearing, whereas the contractors themselves were permitted to terminate 

their contracts, unlike other federal contractors. The contractors were paid 

based on their allowable costs and generally did not have financial 

incentives that were aligned with quality performance.

5

• use competitive procedures to select new contracting entities to 

process medical claims;

 Specifically, the MMA repealed limitations on the types of 

contractors CMS could use and required that CMS 

• provide incentives for contractors to provide quality services;

• develop performance standards (including standards for customer 

satisfaction);

• comply with the Federal Acquisition Regulation (FAR), except where 

inconsistent with provisions of the MMA;

6

• implement contractor reform by October 2011; and

 

4

Carriers handled the majority of Medicare claims for Part B services provided by 

physicians and other providers, including suppliers of durable medical equipment, while 

fiscal intermediaries administered claims for Part A and B services provided by hospitals, 

other institutions, and home health agencies.

5

Pub. L. No. 108-173, Title II, 117 Stat. 2066, 2167 (2003).

6

The FAR establishes uniform policies for acquisition of supplies and services by 

executive agencies. 48 C.F.R. ch. 1.
 

Page 4 GAO-14-417T

• recompete the contracts at least once every 5 years.7

CMS implemented the MMA contracting reform requirements by shifting 

claims administration tasks from 51 legacy contracts to new entities called 

Medicare Administrative Contractors (MACs). Originally, CMS selected 

15 MACs to process both Part A and B Medicare claims (known as A/B 

MACs) and 4 MACs to process durable medical equipment (DME) claims 

(known as DME MACs). CMS also selected 4 A/B MACs to process 

claims for home health care and hospice services. CMS began awarding 

the MAC contracts in 2006; however, bid protests and consolidation of 

some of the MAC jurisdictions delayed some of the MACs from being fully 

operational. By 2009, most of the legacy contracts had been transitioned 

to MACs and by December 2013, CMS completed that transition.

Under the FAR, agencies may generally select from two broad categories 

of contract types: fixed-price and cost-reimbursement. When 

implementing contractor reform, CMS chose to structure the MAC

contracts as cost-plus-award-fee contracts, a type of cost-reimbursement 

contract. This type of contract allows CMS to provide a financial 

incentive—known as an award fee—to contractors if they achieve certain 

performance goals. In addition to reimbursement for allowable costs and 

a contract base fee (which is fixed at the inception of the contract), a MAC 

can earn the award fee, which is intended to incentivize superior 

performance. In 2010, we reviewed three MACs that had undergone 

award fee plan reviews and found that all three received a portion of the

award fee for which they were eligible, but none of the three received the 

full award fee.

8

In the new contracting environment, MACs are responsible for a variety of 

claims administration functions, most of which were previously performed 

by the legacy contractors. MACs are responsible for processing and 

paying claims, handling the first level of appeal (often referred to as 

redeterminations of denied claims), and conducting medical review of 

 

7

The MMA required that CMS provide for the application of competitive procedures at 

least every 5 years but also stipulated that contracts could be renewed from term to term 

without the application of competitive procedures if the contractors met or exceeded 

performance requirements.

8

See GAO, Medicare Contracting Reform: Agency Has Made Progress with 

Implementation, but Contractors Have Not Met All Performance Standards, GAO-10-71

(Washington, D.C.: March 25, 2010).
 

Page 5 GAO-14-417T

claims—which is done before or after payment to ensure that the 

payment is made only for services that meet all Medicare requirements 

for coverage, coding, and medical necessity.9

CMS is moving toward further consolidation of MAC contracts in hopes 

that consolidation will further improve CMS’s procurement and 

administration processes. Since the original implementation, CMS chose

to consolidate the 15 A/B MACs into 10 jurisdictions and is in the process 

of that consolidation. Currently, there are 5 consolidated A/B MACs that 

are fully operational, 7 A/B MACs that will eventually be consolidated into 

5 jurisdictions, and 4 DME MACs that are fully operational.

In addition, the MACs serve 

as providers’ primary contact with Medicare, including enrolling providers, 

conducting outreach and education, responding to inquiries, and auditing 

provider cost reports.

While CMS has relied on contractors to conduct claims administration 

functions since Medicare’s inception and has worked to consolidate these 

contracts, the agency has been granted additional statutory authority in 

recent years to award new types of contracts to conduct specialized tasks 

within the Medicare program. From 1965 to 1996, the legacy contractors 

were not only responsible for paying claims but also for tasks related to 

program integrity, such as working with law enforcement on cases of 

suspected fraud. However, the Health Insurance Portability and 

Accountability Act of 1996 established the Medicare Integrity Program, 

authorizing CMS to award separate contracts for program integrity 

activities such as investigating suspected fraud.10 These contracts are 

now handled by Zone Program Integrity Contractors and are generally 

aligned with the same jurisdictions as the MACs. In 2003, the MMA 

directed CMS to develop a demonstration project testing the use of 

contractors to conduct recovery audits in Medicare.11

 

9

Medical review can also be conducted by some other types of CMS contractors. See 

GAO, Medicare Program Integrity: Increasing Consistency of Contractor Requirements 

May Improve Administrative Efficiency. 

These contractors, 

known as recovery auditors, conduct data analysis and review claims that 

have been paid to identify improper payments. While other contractors 

that review claims are given a set amount of funding to conduct reviews, 

GAO-13-522 (Washington, D.C.: July 23, 2013).

10Pub. L. No. 104-191, §§ 201, 202, 110 Stat. 1936, 1992-98 (1996) (codified at 42 U.S.C. 

§§ 1395j(k)(4), 1395ddd).

11Pub. L. No. 108-173, § 306, 117 Stat. 2066, 2256-57 (2003). 
 

Page 6 GAO-14-417T

recovery auditors are paid contingency fees on claims they have

identified as improper. To increase efforts to identify and recoup improper 

payments, Congress passed the Tax Relief and Health Care Act of 2006, 

which, among other things, required CMS to implement a permanent and 

national recovery audit contractor program.12

Unlike Medicare FFS, in which contractors process and pay claims, in 

Medicare Part C, CMS contracts with private organizations, known as 

Medicare Advantage organizations (MAOs), to offer MA health plans and 

provide covered health care services to enrolled beneficiaries. CMS pays 

MAOs a pre-determined, fixed monthly payment for each Medicare 

beneficiary enrolled in one of the MAO’s health plans. MA plans must 

provide coverage for all services covered under Medicare FFS, except

hospice care, and may also provide additional coverage not available 

under Medicare FFS.13 MA plans, with some exceptions, must generally 

allow all Medicare beneficiaries who reside within the service area in 

which the plan is offered to enroll in the plan.14

Medicare beneficiaries can generally elect to enroll in an MA plan if one is 

offered in their community.

In addition, MA plans must 

meet all federal requirements for participation, including maintaining and 

monitoring a network of appropriate providers under contract; having 

benefit cost-sharing amounts that are actuarially equivalent to or lower 

than Medicare FFS cost-sharing amounts; and developing marketing 

materials that are consistent with federal guidelines.

15

 

12Pub. L. No. 109-432, §302, 120 Stat. 2922, 2991-92 (2006) (codified at 42 U.S.C. 

§ 1395ddd(h)).

As of February 1, 2014, approximately 

13Most MA plans also provide prescription drug coverage. 

14Exceptions include special needs plans (SNP) and employer group plans. SNPs offer 

benefit packages tailored to beneficiaries who are dually eligible for Medicare and 

Medicaid, are institutionalized, or have certain chronic conditions. Employer group plans 

can be offered to employers’ or unions’ Medicare-eligible retirees and Medicare-eligible 

active employees, as well as to Medicare-eligible spouses and dependants of participants 

in such plans.

15Medicare beneficiaries with end-stage renal disease (ESRD) may only enroll in an MA 

plan if they meet certain criteria. For example, beneficiaries with ESRD may enroll in an 

MA plan if (1) they were already enrolled in the MA plan when they developed ESRD; 

(2) they are eligible for a plan offered by their current or former employer or union that has 

opted to enroll beneficiaries with ESRD; or (3) they had a successful kidney transplant.

Private Plans 

Administer Benefits 

for Beneficiaries 

Enrolled in Medicare 

Advantage, But CMS 

has an Important 

Administrative and 

Oversight Role
 

Page 7 GAO-14-417T

15.3 million beneficiaries—nearly thirty percent of all Medicare 

beneficiaries—were enrolled in MA plans—an all-time high. Those plans 

were offered through 571 contracts between MAOs and CMS.16

Substantial changes in the law regarding contract requirements and other 

parameters of the program—including payment rates—have contributed 

to fluctuations in the number of contracts and enrolled beneficiaries over 

the years. Under authority provided by the Social Security Amendments 

of 1972, CMS first began contracting with private plans to provide care to 

enrolled beneficiaries in 1973.

17

A decade after the Social Security Amendments of 1972, the Tax Equity 

and Fiscal Responsibility Act of 1982 authorized the first full-risk plans 

that were paid a fixed monthly amount per beneficiary that was set at 95 

percent of the expected spending for beneficiaries in Medicare FFS.

The law required plans to provide 

benefits covered under Medicare FFS and to meet certain other

standards. Plans were generally paid on the basis of their costs during 

these early years of contracting. By 1979, the government had 

33 contracts with organizations offering private plans.

18

The payment for each beneficiary was adjusted by demographic and 

other factors. The accuracy of this adjustment was criticized by us and 

other researchers. The demographic payment adjusters resulted in 

excess payments to those plans that enrolled healthier beneficiaries with 

below-average health care costs. This, in part, encouraged continued 

growth in Medicare private plans and by May 1, 1997, 4.6 million 

beneficiaries—nearly 12 percent of all Medicare beneficiaries—were 

enrolled in private plans under 280 contracts. At the same time, concerns 

were raised that basing plan payment rates on local Medicare FFS 

spending—the methodology used to geographically adjust payment 

rates—resulted in no or low plan participation in some areas, particularly 

rural areas.

 

16An MAO may have multiple contracts—for example, covering different geographic areas 

or offering different types of plans—and each contract may include multiple health plan 

benefit packages.

17Pub. L. No. 92-603, § 226, 86 Stat. 1329,1396 (1972). 

18Pub. L. No. 97-248, § 114, 96 Stat. 324, 341 (1982). 
 

Page 8 GAO-14-417T

The Balanced Budget Act of 1997 (BBA) formally established private 

plans as Part C of Medicare and introduced additional changes to the 

program.19 These changes to the program included new types of plans 

that could be offered,

20 the standards applied to the contracts, beneficiary 

enrollment rules, and payment rules. In an effort to refine the payment 

methodology, the BBA required CMS to use health status measures to 

adjust payments to plans,21 added a payment methodology establishing a 

minimum amount or floor rate, and limited rate updates in higher payment 

counties that, with other refinements, resulted in reducing some of the 

payment differences between high and low spending areas. Following 

these changes, and coincidental with broad-based dissatisfaction with 

managed care practices more generally, organizations offering Medicare 

private plans reversed what had been a rapid expansion in the mid-1990s 

and began a period of plan withdrawals and declining beneficiary 

enrollment in plans. For example, from 1999 through 2003, the number of 

Medicare contracts with private plans fell from 309 to 154. During the 

same period, private plan enrollment fell from about 6.3 million to 

4.6 million beneficiaries. Subsequent legislation providing new methods 

of adjusting payments to account for health status, among other things, 

did little to entice them back into the program.22

Private plan participation in Medicare began to rebound after passage of 

the MMA. The law made the program more attractive to plans by

establishing minimum payments of 100 percent of Medicare FFS 

spending and pegging the minimum increase to the Medicare national per 

capita growth rate, providing substantial annual increases over those 

authorized under the BBA. As of December 2009, enrollment had grown 

to about 10.9 million beneficiaries.

 

19See Pub. L. No. 105-33, § 4001, 111 Stat. 251, 274 (1997). 

20For example, CMS was authorized to contract with Preferred Provider Organizations 

(PPO). Beneficiaries in PPOs can see both in-network and out-of-network providers but 

must pay higher cost-sharing amounts if they use out-of-network services.

21The BBA uses the term “risk adjustment factors.”

22See the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999, 

Pub. L. No. 106-113, App. F, Title V, §§ 501 et seq.,113 Stat.1501, 1501A-378 (1999) and 

the Medicare, Medicaid and SCHIP Improvement Act of 2000, Pub. L. No. 106-554, 

App. F, Title VI, Subtitle A, §§ 601 et seq., 114 Stat. 2763, 2763A-554 (2000). 
 

Page 9 GAO-14-417T

The Patient Protection and Affordable Care Act (PPACA) included several 

changes to the MA program, such as bringing payments to plans closer to 

Medicare FFS, and rewarding plans for quality.23 Since March 2010, 

enrollment in MA plans has grown from 11.0 million to 15.3 million—an 

increase of about 39 percent. While contract requirements for MAOs and

parameters of the program are largely derived from statute, CMS has 

responsibility to implement the program and ensure compliance with 

these requirements. The agency’s responsibilities include, among other 

things, making monthly payments to MA plans, implementing health 

status adjustments to the payments, establishing processes for enrolling 

and disenrolling beneficiaries, reviewing marketing materials, providing 

for independent review of coverage appeals, conducting audits, and 

enforcing compliance. The audits typically involve a combination of desk 

reviews of documents submitted by MA plans, and at CMS’s discretion, 

site visits. To ensure compliance, CMS may take a variety of enforcement 

actions, ranging from informal contacts offering technical assistance to 

civil money penalties or plan suspension for egregious or sustained 

noncompliance.

Whereas MA offers beneficiaries an alternative way to access their Part A 

and B benefits, Part D is structured to provide benefits only through 

private organizations under contract to Medicare.24 Under the Part D 

program, which began providing benefits on January 1, 2006, CMS 

contracts with private organizations called plan sponsors.25

 

23See Pub. L. No. 111-148, Title III, Part III, Subtitle C, §§ 3201 et seq., 124 Stat. 119, 

442 (2010). For purposes of this testimony, references to PPACA include the 

amendments made by the Health Care and Education Reconciliation Act of 2010, Pub. L. 

No. 111-152, § 1102, 124 Stat. 1029, 1040 (2010).

Part D plan 

sponsors offer outpatient prescription drug coverage either through standalone prescription drug plans for those in original FFS Medicare, or 

through MA prescription drug plans for beneficiaries enrolled in MA. 

Through the Part D contracts, plan sponsors offer prescription drug plans 

24In some cases beneficiaries can enroll in a prescription drug plan that is offered by an 

employer or union. Those plans also contract with CMS. 

25Plan sponsors include health insurance companies and pharmacy benefit managers. 

Although pharmacy benefit managers typically manage prescription drug benefits for thirdparty payers, some pharmacy benefit managers have contracted directly with Medicare to 

offer Part D plans.

Private Plans Also

Administer 

Prescription Drug 

Coverage Under 

Part D
 

Page 10 GAO-14-417T

which may have different beneficiary cost-sharing arrangements (such as 

copayments and deductibles) and charge different monthly premiums.

Medicare pays plan sponsors a monthly amount per enrollee independent 

of each enrollee’s drug use, therefore creating an incentive for the plan 

sponsor to manage spending. Payments to prescription drug plan 

sponsors are adjusted according to the risk factors—including diagnoses 

and demographic factors—of beneficiaries enrolled in a sponsor’s plans. 

However, sponsors still have an incentive to control spending to ensure it

remains below the adjusted monthly payments received from CMS and 

payments received from enrolled beneficiaries. Sponsors can lower drug 

spending by applying various utilization management restrictions to drugs 

on their formularies.26

The MMA required that plan sponsors offer beneficiaries a standard 

benefit plan, with specified deductible and coinsurance amounts, or a 

plan with benefits that are actuarially equivalent to the standard plan. 

Actuarially equivalent plans have the same average benefit value as the 

standard benefit plan but a different benefit structure. If a sponsor offers 

the standard benefit or an actuarially equivalent plan, it may also offer an 

enhanced plan with a higher average benefit level in the same area. For 

instance, an enhanced plan may offer lower cost sharing, an expanded 

formulary, or coverage in the coverage gap.

 The Part D program also relies on sponsors to 

generate prescription drug savings, in part, through their ability to 

negotiate price concessions, such as rebates and discounts, with entities 

such as drug manufacturers, pharmacy benefit managers, and 

pharmacies.

27

 

26A formulary is a list of the prescription drugs that a plan covers and the terms under 

which they are covered.

According to the Medicare 

Payment Advisory Commission, about 94 percent of enrollees in stand27Prior to 2011, enrollees exceeding an initial coverage limit were responsible for paying 

the full cost of covered drugs until they reached an out-of-pocked maximum. Beginning in 

2011, PPACA established the Medicare Coverage Gap Discount Program to assist 

beneficiaries who do not receive Part D’s low-income subsidy with their drug costs when 

they reach the coverage gap. See GAO, Medicare Part D Coverage Gap: Discount 

Program Effects and Brand-Name Price Trends, GAO-12-914 (Washington, D.C.: 

Sept. 28, 2012).
 

Page 11 GAO-14-417T

alone prescription drug plans in 2012 were enrolled in actuarially 

equivalent or enhanced benefit plans.28

While CMS contracts with plan sponsors to offer the Part D benefit, the 

agency has an oversight role. As with MA, CMS is responsible for 

ensuring that the payments it makes to plans sponsors are accurate. 

Given that final payments to plan sponsors are based, in part, on the 

price concessions that plan sponsors have negotiated, CMS is 

responsible for ensuring that data plan sponsors submit on price 

concessions are accurate.29 CMS also ensures that plan sponsors submit 

accurate information to the Medicare Plan Finder interactive website,30

which helps beneficiaries compare different plans and identify the plan 

that best meets their needs.31 CMS oversees the complaints and 

grievances processes and may rely on complaints and grievances data to 

undertake compliance actions against specific plan sponsors.32 CMS also 

oversees Part D sponsors’ fraud and abuse programs, which include 

compliance plans that must include measures to detect, correct, and 

prevent fraud, waste, and abuse.33

Medicare spending on the Part D program has been lower than originally 

anticipated. Medicare’s actuaries have attributed lower-than-projected 

expenditures to a combination of factors, including lower-than-projected 

Part D enrollment, slower growth of drug prices in recent years, greater 

 

28Medicare Payment Advisory Commission, Report to Congress: Medicare Payment 

Policy, (Washington, D.C.: March 2013).

29See GAO, Medicare Part D Prescription Drug Coverage: Federal Oversight of Reported 

Price Concessions Data, GAO-08-1074R, (Washington, D.C.: Sept. 30, 2008).

30See www.medicare.gov/find-a-plan.

31See GAO, Medicare Part D: CMS Has Implemented Processes to Oversee Plan Finder 

Pricing Accuracy and Improve Website Usability, GAO-14-143, (Washington, D.C.: 

Jan. 10, 2014).

32If beneficiaries are not satisfied with certain aspects of the Part D program, they may file 

a complaint with CMS, a grievance with their plan sponsor, or both. See GAO, Medicare 

Part D: Complaint Rates Are Declining, but Operational and Oversight Challenges 

Remain, GAO-08-719, (Washington, D.C.: June 27, 2008).

3342 C.F.R. § 423.504(b)(4)(vi) (2013). See GAO, Medicare Part D: CMS Conducted 

Fraud and Abuse Compliance Plan Audits, but All Audit Findings Are Not Yet Available, 

GAO-11-269R, (Washington, D.C.: Feb. 18, 2011).
 

Page 12 GAO-14-417T

use of generic drugs, and higher-than-expected rebates from 

pharmaceutical manufacturers to the prescription drug plans.

Chairman Pitts, Ranking Member Pallone, and Members of the 

Subcommittee, this completes our prepared statement. We would be 

pleased to respond to any questions that you may have at this time.

If you have any questions about matters discussed in this testimony, 

please contact Kathleen M. King at (202) 512-7114 or kingk@gao.gov

or James Cosgrove at (202) 512-7114 or cosgrovej@gao.gov. 

Contact points for our Offices of Congressional Relations and Public 

Affairs may be found on the last page of this statement. Other key 

contributors to this report include Lori Achman, Sheila K. Avruch, 

George Bogart, Christine Brudevold, Christine Davis, Christie Enders, 

and Gregory Giusto.

GAO Contacts and 

Staff 

Acknowledgments

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